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Rekenthaler Report

A Stock Market Bubble Is Forming

However, it has not (yet) become a mania.


The Main Story
My friend Bill Bernstein has written a splendid book on manias, financial and otherwise, entitled “The Delusions of Crowds.” (His title deliberately echoes that of the Charles Mackay classic.) It won't be published until February, but I can offer a sneak preview, by invoking the four conditions that he cites that historically have preceded investment bubbles. I then apply those precepts to the current U.S. stock market.

1) Lower Interest Rates
This item and the next owe to observations from economist Hyman Minksy, who emphasized the fallibility of the invisible hand. Minsky regarded the financial markets as inherently unstable, progressing from overly cautious to appropriately bold to distressingly speculative to eventually collapsing, at which point the cycle repeats. The third stage is fueled by reductions in interest rates, which create easy money.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.